An over-reliance on bonds may result in a critical retirement shortfall for U.S. investors
March 7, 2018 (New York, NY) – Roger Ibbotson, economist and creator of the iconic “Stock, Bonds, Bills, and Inflation” (SBBI®) chart, today unveiled his latest research that analyzed the emerging potential of Fixed Indexed Annuities (FIA) as an alternative to bonds in retirement portfolios. Researched and written by Ibbotson and his team at Zebra Capital Management, the whitepaper “Fixed Indexed Annuities: Consider the Alternative” suggests bond returns in today’s historically low interest rate environment may be insufficient in meeting the anticipated retirement needs of U.S. investors, potentially placing many at risk of outliving their retirement savings.
Ibbotson is a 10-time recipient of Graham & Dodd Awards for financial research excellence and a professor emeritus at the Yale School of Management. In 1979, his research on risk premiums changed the trajectory of the financial industry, demonstrating the relationship between risk and return and illustrating equities are needed in a portfolio in order to generate long-term growth. During that time, he gained national notoriety for his daring prediction that the Dow would hit 10,000 by the year 2000 – which proved accurate within just months of his estimate.
Today, Ibbotson’s latest research demonstrates that uncapped FIAs help control equity market risk, mitigate longevity risk, and have the potential to outperform bonds in the near future.
Grappling with shifting markets, longevity and Social Security uncertainties
“What financial advisors should acknowledge is the immense impact that shifting market conditions, longer life expectancies, and uncertainties surrounding the future of Social Security have made on our U.S. economy,” said Ibbotson. “In recent years, we recognized the potential of these conditions to result in a perfect storm where investors may be left with insufficient funds to carry them through retirement.”
“Conventional wisdom has most investors de-risking their portfolios by allocating more heavily to bonds as they approach retirement,” continued Ibbotson. “However, investors should consider other alternatives such as FIAs. In this low interest rate environment, complacency can be a danger to our clients’ futures.”
In collaboration with Annexus, the researchers utilized S&P 500® Index dynamic participation rates to simulate FIA performance over the past 90 years and presented the results in similar fashion to Ibbotson’s iconic SBBI® chart. The subsequent data, which considered historical volatility, interest rates, and dividend rates, indicated:
- Uncapped FIAs would have outperformed bonds on an annualized basis for the past 90 years
- It is highly unlikely bond investors will realize as high a return from capital gains in the coming 10 years as they have realized in the past 10 years. In fact, if rates rise, capital gains in the future will be negative (capital losses)
- Uncapped FIAs offer a more tailored risk profile than bonds, capturing a portion of the growth offered by large-cap stocks, while lowering overall market risk
“This is the single most important body of work I have seen in my 25 years of working in this industry, and the first to validate Fixed Indexed Annuities as an asset class,” said Don Dady, Co-founder of Annexus. “The evolution of the industry has made these vehicles more flexible and attractive than ever with the emergence of uncapped product designs and Smart Beta indices. In today’s fiduciary environment, it is imperative that advisors know what products are available and best suited to address the needs of their clients.”
More detailed findings, as well as a full methodology, can be found in the Ibbotson and Zebra Capital Management whitepaper, “Fixed Indexed Annuities: Consider the Alternative.”
For more information about Zebra Capital Management, visit www.zebracapital.com. To learn more about Annexus, visit www.annexus.com.
About Zebra Capital Management
Zebra Capital Management is an SEC-registered investment adviser focusing on the application of a behavioral finance derived investment philosophy. Zebra Capital was established in 2001 and is based in Connecticut. Zebra Capital grants certain license rights and/or sub-licensing rights of its intellectual and other property rights to one or more third parties for the creation, sponsorship, compilation, maintenance and calculation, among other things, of one or more indices to which certain fixed indexed annuities refer. The marks Zebra® and Zebra Edge® are registered trademarks of Zebra Capital Management, LLC. For more information about Zebra Capital, please visit: www.zebracapital.com.
Annexus designs solutions to help Americans grow and protect their retirement savings. For over a decade, Annexus has developed market-leading fixed indexed annuities and indexed universal life insurance products. In close collaboration with design partner Genesis Financial, Annexus has forged relationships with many of the industry’s leading insurance carriers and the world’s largest investment banks. Find out more about Annexus and our products at www.annexus.com.